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There are 3 routes you can take to investing in the stock market. These all involve buying stocks of some sort in different ways.

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What is a stock?

Companies sell stocks to the general public in order to raise funds, which they can then utilise to further develop their business. In return for an investor buying stocks, they become an owner of the company in proportion to how many shares they purchased. ​

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The benefits of owning stocks is that if a company has had a successful year they will often reward their shareholders by paying out a proportion of their profits in the year to its shareholders. 

 

For example, if a company makes £10m in profits, they may make the decision to pay £6m out to its shareholders and then reinvest the other £4m back into the business. If the company had 10,000,000 shares in existence, each shareholder would receive 60p per share they own (£6,000,000 / 10,000,000). 

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In addition, a stocks price can rise over time, which also presents shareholders the opportunity to sell their stocks for a profit.

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The 3 ways to get into the stock market and potentially obtain some of the benefits mentioned above are as follows. 

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1. Buying Individual Stocks

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You can purchase individual stocks. This is very dangerous because your risk exposure is likely to be sky high. This is because you need to be highly diversified to ensure that your overall returns are not drastically harmed by market swings in various sectors. 

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The odds are stacked against investment professionals to beat the market return, let alone the everyday Joe. Buying individual stocks is no different to gambling. If you think otherwise, you are deluded. 

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2. Buying Actively Managed Mutual Funds

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An actively managed fund is very much a hands on approach to investing by a portfolio manager and their team. The portfolio manager will decide on a number of stocks to invest in, such as 100 companies. They will invest in companies based off of their analysis, what stocks they believe will beat the average market return (which could be obtained through investing in an index fund). 

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If you were to invest in an actively managed fund then you are investing in all of the stocks within it. Sounds good right? Whilst it might seem appealing to have a "professional" do the investing for you, history has proven that they frequently underperform the market return. 

 

Check out my blog post on why actively managed funds suck by clicking here.

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3. Buying Index Funds 

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An index fund is very much a hands-off approach to investing. It represents a collection of stocks that tries to track a financial market index. There are no decisions made about what stocks to invest in and how much should be invested in each stock.

 

The most well known financial market index is the S&P 500. This is a collection of the top 500 companies in America. 

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Below you can see the holding details of the S&P 500 as at the 28th of February 2022.  

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